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May 9, 2022, 5:04 p.m. EDT

10-Q: INTERNATIONAL FLAVORS & FRAGRANCES INC

(EDGAR Online via COMTEX) -- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

(UNLESS INDICATED OTHERWISE, DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

The following management's discussion and analysis should be read in conjunction with the management's discussion and analysis of financial condition and results of operations, liquidity and capital resources included in our 2021 Annual Report on Form 10-K ("2021 Form 10-K").

OVERVIEW

Company Background

On February 1, 2021, the Company completed its Merger with Nutrition & Biosciences, Inc. ("N&B"), a subsidiary of DuPont formed to hold the Nutrition and Biosciences business (the "N&B Business", and such transaction, the "N&B Transaction") pursuant to an Agreement and Plan of Merger (the "Merger Agreement") with DuPont de Nemours, Inc. ("DuPont"). The shares issued in the Merger represented approximately 55.4% of the common stock of IFF on a fully diluted basis, after giving effect to the Merger, as of February 1, 2021.

As a result of the N&B Transaction, and following our 2018 acquisition of Frutarom Industries Ltd., we have expanded our global leadership positions, which now include high-value ingredients and solutions in the Food & Beverage, Home & Personal Care and Health & Wellness markets, and across key Taste, Texture, Scent, Nutrition, Enzymes, Cultures, Soy Proteins, Pharmaceutical Excipients, Biocides and Probiotics categories.

We are organized into four reportable operating segments: Nourish, Health & Biosciences, Scent, and Pharma Solutions. The Company's consolidated financial information for the three months ended March 31, 2022 reflect the results of N&B for the full three months in the first quarter of 2022, whereas the three months ended March 31, 2021 reflect only two months of results of N&B in the first quarter of 2021.

Our Nourish segment consists of an innovative and broad portfolio of natural-based ingredients to enhance nutritional value, texture and functionality in a wide range of beverage, dairy, bakery, confectionery and culinary applications.

Our Health & Biosciences segment consists of a biotechnology-driven portfolio where enzymes, food cultures, probiotics and specialty ingredients for food and non-food applications are developed and produced. The biotechnology-driven portfolio of this segment produces cultures for use in fermented foods such as yogurt, cheese and fermented beverages. It also uses industrial fermentation to produce enzymes and microorganisms that provide product and process performance benefits to household detergents, animal feed, ethanol production and brewing. Health & Biosciences is comprised of six business units: Health, Cultures & Food Enzymes, Home & Personal Care, Animal Nutrition, Grain Processing and Microbial Control.

Our Scent segment creates fragrance compounds, fragrance ingredients and cosmetic ingredients that are integral elements in the world's finest perfumes and best-known household and personal care products. The Scent segment is comprised of three business units: Fragrance Compounds, Fragrance Ingredients and Cosmetic Actives.

Our Pharma Solutions segment produces a vast portfolio of cellulosics and seaweed-based pharmaceutical excipients, used to improve the functionality and delivery of active pharmaceutical ingredients, including controlled or modified drug release formulations, and enabling the development of more effective pharmaceutical formulations.

Financial Measures - Currency Neutral

Changes in our financial results include the impact of changes in foreign currency exchange rates. We provide currency neutral calculations in this report to remove the impact of these items. Our method in calculating currency neutral numbers is conducted by translating current year invoiced sale amounts at the exchange rates used for the corresponding prior year period. We use currency neutral results in our analysis of subsidiary or segment performance. We also use currency neutral numbers when analyzing our performance against our competitors and believe the change in method better allows us to do so.

For the first quarter of 2022, the Company is not presenting currency neutral numbers for the Nourish, Health & Biosciences and Pharma Solutions operating segments as these operating segments include the effects of the Merger with N&B, which closed on February 1, 2021. As a result, the three months ended March 31, 2022 reflect the results of N&B for the full three months in the first quarter of 2022, whereas the three months ended March 31, 2021 reflect only two months of results of N&B in the first quarter of 2021, which do not present equally comparable periods.

Impact of COVID-19 Pandemic

On March 11, 2020, the World Health Organization designated COVID-19 as a global pandemic. Various policies and initiatives have been implemented around the world to reduce the global transmission of COVID-19. Although there continue to be minor disruptions, all of IFF's manufacturing facilities remain open and continue to manufacture products.

The COVID-19 pandemic remains a serious threat to the health of the world's population and certain countries and regions continue to suffer from outbreaks or have seen a recurrence of infections, especially with the emergence of new variants of the virus. Accordingly, the Company continues to take the threat from COVID-19 seriously. The impact that COVID-19 will have on our consolidated results of operations for the remainder of 2022 remains uncertain. Due to the length and severity of COVID-19, there is continued volatility as a result of retail and travel, consumer shopping and consumption behavior. Moreover, as a result of disruptions or uncertainty relating to the COVID-19 pandemic, we are experiencing, and may continue to experience, increased costs, delays or limited availability related to raw materials, strain on shipping and transportation resources, and higher energy prices, which have negatively impacted, and may continue to negatively impact, our margins and operating results. We will continue to evaluate the nature and extent of these potential impacts to our business, consolidated results of operations, segment results, liquidity and capital resources.

Although IFF has not experienced and does not currently anticipate any impairment charges related to COVID-19, the continuing effects of a prolonged pandemic could result in increased risk of asset write-downs and impairments. Any of these events could potentially result in a material adverse impact on IFF's business and results of operations.

For more detailed information about risks related to COVID-19, refer to Part I, Item 1A, "Risk Factors," of our 2021 Form 10-K filed on February 28, 2022 with the SEC.

Impact of the Events in Russia and Ukraine

We maintain operations in both Russia and Ukraine and, additionally, export products to customers in Russia and Ukraine from operations outside the region. In response to the events in Ukraine, we have limited the production and supply of ingredients in and to Russia to only those that meet the essential needs of people, including food, hygiene and medicine.

In 2021, total sales to Russian customers were approximately 2% of total sales. For the three months ended March 31, 2022 sales to Russian customers were also approximately 2% of total sales.

In 2021, total sales to Ukrainian customers were less than 1% of total sales. For the three months ended March 31, 2022 sales to Ukrainian customers were also less than 1% of total sales.

For the first quarter of 2022, we recorded a charge of approximately $20 million related to expected credit losses on receivables from customers located in Russia and Ukraine (for both export and domestic sales) and performed a test of recoverability of certain long-lived assets in the affected countries. For additional information, refer to Note 1 to the Consolidated Financial Statements and Part I, Item 1A, "Risk Factors," of our 2021 Form 10-K filed on February 28, 2022 with the SEC.

Financial Performance Overview

For a reconciliation between reported and adjusted figures, please refer to the "Non-GAAP Financial Measures" section.

Sales

Sales in the first quarter of 2022 increased $761 million, or 31% on a reported basis, to $3.226 billion compared to $2.465 billion in the 2021 period. Sales included approximately $568 million of incremental sales attributable to N&B for the month of January in the 2022 period. In addition, the increase in sales was driven by volume and price increases across the business.

Gross Profit

Gross profit in the first quarter of 2022 increased $391 million, or 52% on a reported basis, to $1.145 billion (35.5% of sales) compared to $754 million (30.6% of sales) in the 2021 period. Gross profit included approximately $179 million attributable to N&B for the month of January in the 2022 period. In addition, the increase in gross profit was driven by price and volume increases in the overall business.

Adjusted Operating EBITDA

Adjusted operating EBITDA in the first quarter of 2022 increased $133 million, or 23% on a reported basis, to $702 million (21.8% of sales) compared to $569 million (23.1% of sales) in the comparable 2021 period. Adjusted operating EBITDA included approximately $137 million attributable to N&B for the month of January in the 2022 period.







        RESULTS OF OPERATIONS
                                                                  Three Months Ended
                                                                      March 31,
        (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)            2022           2021         Change
        Net sales                                             $   3,226       $ 2,465          31    %
        Cost of goods sold                                        2,081         1,711          22    %
        Gross profit                                              1,145           754          52    %
        Research and development (R&D) expenses                     157           143          10    %
        Selling and administrative (S&A) expenses                   459           451           2    %
        Amortization of acquisition-related intangibles             186           152          22    %
        Restructuring and other charges                               2             4         (50)   %
        Operating profit                                            341             4              NMF
        Interest expense                                             72            65          11    %
        Other income, net                                           (16)           (7)        129    %
        Income (loss) before taxes                                  285           (54)             NMF
        Provision for (benefit from) income taxes                    39           (14)             NMF
        Net income (loss)                                     $     246       $   (40)             NMF
        Net income attributable to noncontrolling interests           2             2           -    %
        Net income (loss) attributable to IFF stockholders    $     244       $   (42)             NMF
        Net income (loss) per share - diluted                 $    0.96       $ (0.21)             NMF
        Gross margin                                               35.5  %       30.6  %      490  bps
        R&D as a percentage of sales                                4.9  %        5.8  %      (90) bps
        S&A as a percentage of sales                               14.2  %       18.3  %     (410) bps
        Operating margin                                           10.6  %        0.2  %           NMF
        Effective tax rate                                         13.7  %       25.9  %           NMF
        Segment net sales
        Nourish                                               $   1,731       $ 1,308          32    %
        Health & Biosciences                                        661           426          55    %
        Scent                                                       585           569           3    %
        Pharma Solutions                                            249           162          54    %
        Consolidated                                          $   3,226       $ 2,465
        _______________________
        


NMF: Not meaningful

Cost of goods sold includes the cost of materials and manufacturing expenses. R&D includes expenses related to the development of new and improved products and technical product support. S&A expenses include expenses necessary to support our commercial activities and administrative expenses supporting our overall operating activities including compliance with governmental regulations.







        FIRST QUARTER 2022 IN COMPARISON TO FIRST QUARTER 2021
        Sales
        Sales for the first quarter of 2022 increased $761 million, or 31% on a reported
        basis, to $3.226 billion, compared to $2.465 billion in the prior year quarter.
        Sales included approximately $568 million of incremental sales attributable to
        N&B for the month of January in the 2022 period. In addition, the increase in
        sales was driven by volume and price increases across the business.
                                               29
        --------------------------------------------------------------------------------
        Sales Performance by Segment
                                                                   % Change in Sales - First Quarter 2022 vs. First Quarter
                                                                                             2021
                                                                          Reported                    Currency Neutral(1)
        Nourish                                                                       32  %                               NMF
        Health & Biosciences                                                          55  %                               NMF
        Scent                                                                          3  %                              6  %
        Pharma Solutions                                                              54  %                               NMF
        Total                                                                         31  %                               NMF
        _______________________
        


NMF: Not meaningful

Nourish

Nourish sales in 2022 increased $423 million, or 32% on a reported basis, to $1.731 billion compared to $1.308 billion in the prior year period. Nourish sales included approximately $293 million of incremental sales attributable to N&B for the month of January in the 2022 period. In addition, performance in the Nourish operating segment was driven by price and volume increases, with price increases primarily in the Ingredients and Food Design business units and volume increases primarily in the Flavors and Food Design business units.

Health & Biosciences

Health & Biosciences sales in 2022 increased $235 million, or 55% on a reported basis, to $661 million compared to $426 million in the prior year period. Health & Biosciences sales included approximately $202 million of incremental sales attributable to N&B for the month of January in the 2022 period. In addition, performance in the Health & Biosciences operating segment was primarily driven by volume increases across various business units.

Scent

Scent sales in 2022 increased $16 million, or 3% on a reported basis, to $585 million, compared to $569 million in the prior year period. On a currency neutral basis, Scent sales increased 6% in the 2022 period. Sales growth in the Scent operating segment was driven by volume and price increases in both Fragrance Compounds and Fragrance Ingredients, offset by unfavorable impacts from exchange rate variations.

Pharma Solutions

Pharma Solutions sales in 2022 increased $87 million, or 54% on a reported basis, to $249 million compared to $162 million in the prior year period. Pharma Solutions sales included approximately $73 million of incremental sales attributable to N&B for the month of January in the 2022 period. In addition, performance in the Pharma Solutions operating segment was primarily driven by price and volume increases.

Cost of Goods Sold

Cost of goods sold increased $370 million to $2.081 billion (64.5% of sales) in the first quarter of 2022 compared to $1.711 billion (69.4% of sales) in the first quarter of 2021. Cost of goods sold included approximately $389 million of incremental costs attributable to N&B for the month of January in the 2022 period.

Research and Development (R&D) Expenses

R&D expenses increased $14 million to $157 million (4.9% of sales) in the first quarter of 2022 compared to $143 million (5.8% of sales) in the first quarter of 2021. R&D expenses included approximately $20 million of incremental expenses attributable to N&B for the month of January in the 2022 period, which consisted primarily of employee related expenses, including salaries, wages and bonuses and operating expenses for R&D related activities, primarily offset by lower Applied R&D expenses.

Selling and Administrative (S&A) Expenses

S&A expenses increased $8 million to $459 million (14.2% of sales) in the first quarter of 2022 compared to $451 million (18.3% of sales) in the first quarter of 2021. S&A expenses included approximately $51 million of incremental expenses attributable to N&B for the month of January in the 2022 period, which consisted primarily of employee related expenses, including salaries, wages and bonuses, primarily offset by lower administrative expenses principally due to lower professional fees, including consulting costs.

Restructuring and Other Charges

Restructuring and other charges decreased to $2 million in the first quarter of 2022 compared to $4 million in the first quarter of 2021. The decrease was driven by lower severance costs in the first quarter of 2022 (see Note 4 for additional information).

Amortization of Acquisition-Related Intangibles

Amortization expenses increased to $186 million in the first quarter of 2022 compared to $152 million in the first quarter of 2021. Amortization expense included approximately $47 million attributable to N&B for the month of January in the 2022 period related to the intangible assets acquired through the Merger with N&B (see Notes 3 and 5 for additional information).

Interest Expense

Interest expense increased to $72 million in the first quarter of 2022 compared to $65 million in the 2021 period. Interest expense included approximately $13 million attributable to N&B for the month of January in the 2022 period, which included the impact of the additional debt assumed in the Merger with N&B (see Note 7 for additional information). Average cost of debt was 2.5% for the 2022 period compared to 3.8% for the 2021 period.

Other Income, Net

In the first quarter of 2022, we recognized other income, net, of $16 million compared to $7 million in the 2021 period. The change of $9 million includes approximately $6 million attributable to N&B for the month of January in the 2022 period. In addition, the change, excluding the impact of N&B for the month of January in the 2022 period, was due to foreign exchange gains in the first quarter of 2022 compared to foreign exchange losses in the 2021 period.

Income Taxes

The effective tax rate for the three months ended March 31, 2022 was 13.7% compared to 25.9% for the three months ended March 31, 2021. The quarter-over-quarter decrease was primarily due to a favorable mix of earnings and a one-time benefit associated with the proceedings of a bi-lateral advance pricing agreement.

Segment Adjusted Operating EBITDA Results by Business Unit

The Company uses Segment Adjusted Operating EBITDA for internal reporting and performance measurement purposes. Segment Adjusted Operating EBITDA is defined as Income Before Taxes before depreciation and amortization expense, interest expense, restructuring and other charges and certain non-recurring items. Our determination of reportable segments was made on the basis of our strategic priorities within each segment and corresponds to the manner in which our Chief Operating Decision Maker reviews and evaluates operating performance to make decisions about resources to be allocated to the segment. In addition to our strategic priorities, segment reporting is also based on differences in the products and services we provide.







                                                             Three Months Ended March 31,
        (DOLLARS IN MILLIONS)                              2022                             2021
        Segment Adjusted Operating EBITDA:
        Nourish                                     $         329                         $ 270
        Health & Biosciences                                  192                           128
        Scent                                                 116                           128
        Pharma Solutions                                       65                            43
        Total                                                 702                           569
        Depreciation & Amortization                          (303)                         (242)
        Interest Expense                                      (72)                          (65)
        Other income, net                                      16                             7
        Restructuring and Other Charges                        (2)                           (4)
        Shareholder Activism Related Costs                     (3)                           (7)
        Business Divestiture Costs                            (30)                            -
        Employee Separation Costs                              (4)                           (3)
        Frutarom Acquisition Related Costs                     (1)                            -
        N&B Inventory Step-Up Costs                             -                          (182)
        N&B Transaction Related Costs                           -                           (89)
        Integration Related Costs                             (18)                          (38)
        Income (Loss) Before Taxes                  $         285                         $ (54)
        Segment Adjusted Operating EBITDA margin:
        Nourish                                              19.0    %                     20.6  %
        Health & Biosciences                                 29.0    %                     30.0  %
        Scent                                                19.8    %                     22.5  %
        Pharma Solutions                                     26.1    %                     26.5  %
        Consolidated                                         21.8    %                     23.1  %
        


Nourish Segment Adjusted Operating EBITDA

Nourish Segment Adjusted Operating EBITDA increased $59 million to $329 million in the first quarter of 2022 (19.0% of segment sales) from $270 million (20.6% of segment sales) in the comparable 2021 period. Nourish Segment Adjusted Operating EBITDA included approximately $65 million attributable to N&B for the month of January in the 2022 period.

Health & Biosciences Segment Adjusted Operating EBITDA

Health & Biosciences Segment Adjusted Operating EBITDA increased $64 million to $192 million in the first quarter of 2022 (29.0% of segment sales) from $128 million (30.0% of segment sales) in the comparable 2021 period. Health & Biosciences Segment Adjusted Operating EBITDA included approximately $60 million attributable to N&B for the month of January in the 2022 period. In addition, the increase was driven by volume increases across various business units in the operating segment. The decrease in Health & Biosciences Segment Adjusted Operating EBITDA margin, as a percentage of sales, excluding the impact of N&B for the month of January in the 2022 period, was due to an increase in cost of goods sold as a result of higher commodity prices.

Scent Segment Adjusted Operating EBITDA

Scent Segment Adjusted Operating EBITDA decreased $12 million to $116 million in the first quarter of 2022 (19.8% of segment sales) from $128 million (22.5% of segment sales) in the comparable 2021 period. The decrease reflected increases in material costs and unfavorable impacts from exchange rate variations in the operating segment, partially offset by volume increases.

Pharma Solutions Segment Adjusted Operating EBITDA

Pharma Solutions Segment Adjusted Operating EBITDA increased $22 million to $65 million in the first quarter of 2022 (26.1% of segment sales) from $43 million (26.5% of segment sales). Pharma Solutions Segment Adjusted Operating EBITDA included approximately $12 million attributable to N&B for the month of January in the 2022 period. In addition, the increase was driven by price and volume increases. The increase in Pharma Solutions Segment Adjusted Operating EBITDA margin, as a percentage of sales, excluding the impact of N&B for the month of January in the 2022 period, was due to a greater increase in sales than cost of goods sold, which helped to offset the impact of the increase in the cost of goods sold as a result of higher commodity prices.

Liquidity

Cash and Cash Equivalents

We had cash and cash equivalents of $657 million at March 31, 2022 compared to $711 million at December 31, 2021 and of this balance, a portion was held outside the United States. Cash balances held in foreign jurisdictions are, in most circumstances, available to be repatriated to the United States.

Effective utilization of the cash generated by our international operations is a critical component of our strategy. We regularly repatriate cash from our non-U.S. subsidiaries to fund financial obligations in the U.S. As we repatriate these funds to the U.S. we will be required to pay income taxes in certain U.S. states and applicable foreign withholding taxes during the period when such repatriation occurs. Accordingly, as of March 31, 2022, we had a deferred tax liability of approximately $87 million for the effect of repatriating the funds to the U.S., attributable to various non-U.S. subsidiaries. There is no deferred tax liability associated with non-U.S. subsidiaries where we intend to indefinitely reinvest the earnings to fund local operations and/or capital projects.

Cash Flows (Used In) Provided By Operating Activities

Cash flows used in operating activities for the three months ended March 31, 2022 was $4 million, or (0.1)% of sales, compared to cash provided by operating activities of $358 million, or 14.5% of sales, for the three months ended March 31, 2021. The decrease in cash flows from operating activities during 2022 was primarily driven by changes related to inventories, accounts receivables, accrual for incentive compensation, accounts payable and accrued expenses, largely offset by higher cash earnings excluding the impact of non-cash adjustments.

Working capital (current assets less current liabilities) totaled $3.475 billion and $3.354 billion at March 31, 2022 and December 31, 2021, respectively.

We have various factoring agreements in the U.S. and The Netherlands under which we can factor up to approximately $250 million in receivables. In addition, we have factoring agreements sponsored by certain customers. Under all of the arrangements, we sell the receivables on a non-recourse basis to unrelated financial institutions and account for the transactions as a sale of . . .

May 09, 2022

COMTEX_406935984/2041/2022-05-09T17:04:11

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